Bitcoin Cash: Basic Guide for Beginners


June 5, 2018

Bitcoin Cash

Bitcoins were launched in 2008 in the wake of a global financial meltdown when people started losing faith in the modern financial system, and the existing monetary policy was deemed inefficient in stimulating the global economy. As Bitcoin was used more often for financial transactions, it had to evolve and improve to accommodate various uses including a peer to peer electronic cash payment network.

What Is 2017 Hard Fork?

In a bid to improve the way of transacting on the blockchain the Bitcoin went through a hard fork, or a significant update which split the blockchain and gave birth to the new electronic cash Bitcoin Cash (BCH). This was necessary to resolve many issues, one of which was the scaling problem of the first cryptocurrency. The miners also weren’t happy about the SegWit (Segregated Witness) upgrade which was perceived only as a temporary solution unable to address all challenges of Bitcoin scaling.

The scaling problem because a burning issue because the number of transactions in the network grew rapidly. By the time of a hard fork the number of transactions per month increased by 12% every month. With the limit of a block at 1Mb Bitcoin network can process a little more than 4 transactions/sec. The reason for the limit is the prevention of spam and test transactions that could overload the network.

As the number of transactions grew at a rapid rate, the rate of block creation was also increasing. Soon people had to wait longer for new blocks to be created which would allow their transactions to go through. To resolve the problem of a transaction backlog a fee-based prioritization schedule was established. If users wanted their transactions to be verified more quickly, they would have to pay a higher transaction fee. This would motivate miners to move these entries higher in the queue. If the user didn’t want to pay higher transaction fees, the user would have to agree to the waiting time on average 12 minutes to have the transaction processed. This was confusing and didn’t help the mass adoption of the cryptocurrency.

There were lengthy debates against the increase of the block size. One of the arguments was that if the data entries were easily added to the block of a bigger size, the transaction fee would go down and miners may decide to abandon the network in search for a more profitable solution. The decrease in miners mining for blocks will dwindle the hash rate of Bitcoin. Some of the hardcore supported didn’t want Bitcoin to turn into a regular currency that would be used for mass payments, as in their opinion the first ever cryptocurrency had a more meaningful use to it. A similar argument was used against the growing of the network. When the network becomes more resource-consuming, smaller miners could not compete, and this could lead to the domination of larger pools.

In addition, to block size dilemma, the community was split over their attitude to SegWit solution. Usually the transaction in blockchain consists of three elements: sender and receiver details, as well as a signature. On average, the signature occupied more than half of the data in each individual transaction. SegWit update split the transaction so that the data-consuming signature would go into a new block. This helped make transaction verification faster and also possible transaction fees lower. The main drawback is that all wallets had to install SegWit individually and chances were high that many wallet holders wouldn’t be able to do it correctly. The majority of miners didn’t want to do it. SegWit would also increase the resources consumption.

The Bitcoin Cash Creation

The BTC community was already disintegrated when the new version was introduced by a group of Bitcoin community participants. They decided to create a new and improved version of the first ever cryptocoin which would be easier to mine. The new cash called itself a “peer-to-peer electronic cash” motivated to greatly increase the number of transactions and make them quicker and cheaper for all involved.

The Bitcoin was facing a necessity of going through a fork. During a fork the blockchain divides into two chains each containing its own history of transactions. There are two kinds of forks: the soft fork and the hard one. The soft fork is similar to a software update that is backward compatible, for example, if you install Windows 10 but then decide to revert to Windows 8. The hard fork is a complete overhaul of the system. When your favorite iPhone game asks you to update the app, this means that the game has gone through a hard fork, and the previous version of the game cannot be played anymore.

During the Bitcoin Cash hard fork all system participants who owned their private keys were compensated with Bitcoin Cash for their BTC except those amounts that were listed in exchanges. This was the first ever occasion when hard fork preserved the record of previous transactions.

The main difference was that the size of the block increased from 1Mb to 8Mb. Now the average miner was able to add more entries to blockchain and claim more fees. Even though fees were lower, the total amount of them increased.

Bitcoin Cash was not using SegWit and didn’t have the increasing fees protocol that allowed users to bypass the backlog by paying higher fees. Among other interesting features is the protection of replayed attacks that cause or double spending. During such attacks, a malicious protocol copies transactions added to a blockchain and copy them to a different blockchain. This results in double spending of coins by users.

To incentivize miners and encourage them to mine in the new network Bitcoin Cash introduced the adjusting difficulty mechanism. It took the Median Time Past metric — the average of the time required to mine last eleven blocks on the system — to determine if it has become too long for miners to mine new blocks. In this case, the difficulty would be reduced by 20 percent. The difficulty rate that varied depending on the system capacity made blocks easier to mine. The system also adjusted the difficulty depending on a number of participants in the network which in turn had an effect on the hashing power. If there are too few miners, the difficulty goes down because the combined hash power also goes down. This happened in early days of Bitcoin Cash. Low difficulty attracted more miners who abandoned original BTC as they found new opportunity and the difficult adjustment to be more profitable.

How Valuable is BCH?

At the time of writing Bitcoin Cash was the second most valuable cryptocurrency, after the original BTC. Its market cap is third highest after the two biggest players, BTC and Ethereum. Its value is increased further because more and more exchanges are willing to list it. Another driver of value its increasing attractiveness for miners who find it very profitable to mine Bitcoin Cash. As a result, the hash rate of the system is growing which helps to ensure smooth and quick entry verification for participants.

It’s too early to say if Bitcoin Cash lasts or not remains to be seen. Chances are it could become more widespread than Bitcoin thanks to innovative changes made to transacting on its blockchain.